Uzbekistan - ECONOMY

Uzbekistan - The Economy

Chief among the causes of dissension and despair in Uzbekistan is the
country's economic situation. According to United Nations (UN) figures,
in 1994 Uzbekistan was one of the poorest of the developed countries in
the world, with the average monthly wage less than US$50. But vast
natural resources suggest the potential for Uzbekistan to become one of
the most prosperous countries in Central Asia, provided the necessary
reforms can be made to unleash that potential. At the end of the Soviet
era, Uzbekistan was rated as one of the least industrialized Soviet
republics. Government reform, with the theoretical goal of achieving a
market economy, moved cautiously and unevenly in the directions of
industrialization and market reform in the early 1990s. By the
mid-1990s, signs indicated a more serious reform effort.

Uzbekistan - Gold

One of Uzbekistan's most abundant and strategic resources is gold.
Before 1992, Uzbekistan accounted for about one-third of Soviet gold
production, at a time when the Soviet Union ranked third in world gold
production. The Muruntau Gold Mine, about 400 kilometers northwest of
Tashkent in the Qizilqum Desert, is estimated to be the largest gold
mine in the world, and other gold reserves are located in the Chadaq
area of the Fergana Valley, on the southern slopes of the Qurama
Mountains. In 1992, a reported 80 tons of gold were mined in Uzbekistan,
making it the eighth largest producer of gold in the world. Fluorospar,
the most important source of fluorine, is mined at Tuytepa between
Olmaliq and Tashkent. In the region of Olmaliq, southeast of Tashkent,
are deposits of copper, zinc, lead, tungsten, and molybdenum that are
used in the well-developed metallurgical processing industries centered
in northeastern Uzbekistan. Uranium is mined and processed on the slopes
of the Chatkal and Qurama ranges that surround the Fergana Valley.

Uzbekistan - Energy

Uzbekistan is also rich in energy resources, although it was a net
importer of fuels and primary energy throughout the Soviet period. The
republic was the third largest producer of natural gas in the former
Soviet Union behind Russia and Turkmenistan, producing more than 10
percent of the union's natural gas in the 1980s. In 1992 Uzbekistan
produced 42.8 billion cubic meters of natural gas; although this output
was used mostly within the republic in the Soviet period, pipelines to
Tajikistan, Kazakstan, and Russia exported increasing amounts of natural
gas to those countries in the early 1990s. Gas reserves are estimated at
more than 1 trillion cubic meters. Deposits are concentrated mainly in
Qashqadaryo Province in the southeast and near Bukhoro in the
south-central region. Bukhoro gas is used to fuel local thermoelectric
power plants. The biggest gas deposit, Boyangora-Gadzhak, was discovered
in southeastern Surkhondaryo Province in the 1970s.

Uzbekistan also has small coal reserves, located mainly near Angren,
east of Tashkent. In 1990 the total coal yield was 6 million tons. Oil
production has likewise been small; Uzbekistan has relied on Russia and
Kazakstan for most of its supply. Oil production was 3.3 million tons in
1992. But the discovery in 1994 of the Mingbulak oil field in the far
northeastern province of Namangan may ultimately dwarf Uzbekistan's
other energy resources. Experts have speculated that Mingbulak may prove
to be one of the world's most productive oil fields. Located in the
central basin of the Fergana Valley, the deposits could produce hundreds
of millions of dollars worth of oil in the late 1990s. Qoqdumalaq in
western Uzbekistan also has rich oil and natural gas deposits,
reportedly containing hundreds of millions of tons of oil.

The coal deposits on the Angren River east of Tashkent and the
natural gas deposits near Bukhoro are prime fuels for Uzbekistan's
thermoelectric power plants. The well-developed hydroelectric power
generating system utilizes the Syrdariya, Naryn, and Chirchiq rivers,
all of which arise to the east in the mountains of Kyrgyzstan.
Agreements with Kyrgyzstan and Tajikistan, through which the Syrdariya
also flows, ensure a continued water flow for Uzbek power plants.

Uzbekistan - Agriculture

Uzbekistan has the advantages of a warm climate, a long growing
season, and plentiful sources of water for irrigation. In the Soviet
period, those conditions offered high and reliable yields of crops with
specialized requirements. Soviet agricultural policy applied
Uzbekistan's favorable conditions mainly to cotton cultivation. As
Uzbekistan became a net exporter of cotton and a narrow range of other
agricultural products, however, it required large-scale imports of grain
and other foods that were not grown in sufficient quantities in domestic
fields.

Organization of Agriculture

In the last decades of Soviet rule, the private agricultural sector
produced about 25 percent of total farm output almost exclusively on the
small private plots of collective and state farmers and nonagricultural
households (the maximum private landholding was one-half hectare). In
the early 1990s, Uzbekistan's agriculture still was dominated by
collective and state farms, of which 2,108 were in operation in 1991.
Because of this domination, average farm size was more than 24,000
hectares, and the average number of workers per farm was more than 1,100
in 1990. More than 99 percent of the value of agricultural production
comes from irrigated land (see table 21, Appendix).

Economic Structure of Agriculture

Uzbekistan's economy depends heavily on agricultural production. As
late as 1992, roughly 40 percent of its net material product (NMP--see
Glossary) was in agriculture, although only about 10 percent of the
country's land area was cultivated. Cotton accounts for 40 percent of
the gross value of agricultural production. But with such a small
percentage of land available for farming, the single-minded development
of irrigated agriculture, without regard to consumption of water or
other natural resources, has had adverse effects such as heavy
salinization, erosion, and waterlogging of agricultural soils, which
inevitably have limited the land's productivity. According to the
Ministry of Land Reclamation and Water Resources, for example, after
expansion of agricultural land under irrigation at a rate of more than 2
percent per year between 1965 and 1986, conditions attributed to poor
water management had caused more than 3.4 million hectares to be taken
out of production in the Aral Sea Basin alone. According to other
reports, about 44 percent of the irrigated land in Uzbekistan today is
strongly salinated. The regions of Uzbekistan most seriously affected by
salinization are the provinces of Syrdariya, Bukhoro, Khorazm, and
Jizzakh and the Karakalpakstan Republic (see fig. 13). Throughout the
1980s, agricultural investments rose steadily, but net losses rose at an
even faster rate.

Cotton

Uzbekistan's main agricultural resource has long been its "white
gold," the vast amounts of cotton growing on its territory.
Uzbekistan always was the chief cotton-growing region of the Soviet
Union, accounting for 61 percent of total Soviet production; in the
mid-1990s it ranks as the fourth largest producer of cotton in the world
and the world's third largest cotton exporter. In 1991 Uzbekistan's
cotton yield was more than 4.6 million tons, of which more than 80
percent was classified in the top two quality grades. In 1987 roughly 40
percent of the workforce and more than half of all irrigated land in
Uzbekistan--more than 2 million hectares--were devoted to cotton.

Other Crops

In light of increasing water shortages in Central Asia and the end of
the Soviet distribution system that guaranteed food imports, government
leaders have proposed reducing cotton cultivation in favor of grain and
other food plants to feed an increasingly impoverished population. In
fact, between 1987 and 1991 land planted to cotton decreased by 16
percent, mainly in favor of grains and fruits and vegetables. But
Uzbekistan's short-term needs for hard currency make dramatic declines
in cotton cultivation unrealistic. Likewise, Uzbekistan's entire
existing agricultural infrastructure--irrigation systems, configuration
of fields, allocation and type of farm machinery, and other
characteristics--is geared toward cotton production; shifting to other
crops would require a massive overhaul of the agricultural system and a
risk that policy makers have not wished to take in the early years of
independence. Under these circumstances, continued commitment to cotton
is seen as a good base for longer-term development and diversification.

In 1991 Uzbekistan's main agricultural products, aside from cotton,
were grains (primarily wheat, oats, corn, barley, and rice), fodder
crops, and fruits and vegetables (primarily potatoes, tomatoes, grapes,
and apples). That year 41 percent of cultivated land was devoted to
cotton, 32 percent to grains, 11 percent to fruits, 4 percent to
vegetables, and 12 percent to other crops. In the early 1990s,
Uzbekistan produced the largest volume of fruits and vegetables among
the nations of the former Soviet Union. Because Uzbekistan's yield per
hectare of noncotton crops is consistently below that for other
countries with similar growing conditions, experts believe that
productivity can be improved significantly.

Uzbekistan - Industry

Uzbekistan's industrial sector accounted for 33 percent of its NMP in
1991. Despite some efforts to diversify its industrial base, industry
remains dominated by raw materials extraction and processing, most of
which is connected with cotton production and minerals (see table 22,
Appendix). As illustrated especially by the domestic oil industry, in
the Soviet era industrial production generally lagged behind
consumption, making Uzbekistan a net importer of many industrial
products. Under the difficult economic conditions caused by the collapse
of the Soviet Union's system of allocations and interdependence of
republics, this situation has worsened. In 1993 total manufacturing had
decreased by 1 percent from its 1990 level, and mining output had
decreased by more than 8 percent (see table 6, Appendix).

Heavy Industry

The Tashkent region, in the northeastern "peninsula"
adjacent to the Fergana Valley, accounts for about one-third of the
industrial output of Uzbekistan, with agricultural machinery the most
important product. The city is the nucleus of an industrial region that
was established near mineral and hydroelectric resources stretching
across northeastern Uzbekistan from the Syrdariya in the west to the
easternmost point of the nation. Electricity for the industries of the
region comes from small hydroelectric stations along the Chirchiq River
and from a gas-fired local power station.

Uzbekistan's most productive heavy industries have been extraction of
natural gas and oil; oil refining; mining and mineral processing;
machine building, especially equipment for cotton cultivation and the
textile industry; coal mining; and the ferrous metallurgy, chemical, and
electrical power industries. The chemical manufacturing industry focuses
primarily on the production of fertilizer.

Two oil refineries in Uzbekistan, located at Farghona and Amtiari,
have a combined capacity of 173,000 barrels per day. Other centers of
the processing industries include Angren (for coal), Bekobod (steel),
Olmaliq (copper, zinc, and molybdenum), Zarafshon (gold), and Yangiobod
(uranium). The Uzbek fertilizer industry was established at Chirchiq,
northeast of Tashkent, near Samarqand, and at several sites in the
Fergana Basin. Uzbekistan is the largest producer of machinery for all
phases of cotton cultivation and processing, as well as for irrigation,
in the former Soviet Union. The machine building industry is centered at
Tashkent, Chirchiq, Samarqand, and Andijon in the east, and at Nukus in
Karakalpakstan.

Light Industry

The predominant light industries are primary processing of cotton,
wool, and silk into fabric for export, and food processing. In 1989
light industry accounted for 27.1 percent of industrial production; that
category was completely dominated by two sectors, textiles (18.2
percent) and agricultural food processing (8.9 percent). The nature of
the Uzbek textile industry in the mid-1990s reflects the Soviet
allotment to Uzbekistan of primary textile processing rather than
production of finished products. Food processing has diversified to some
degree; the industry specializes in production of dried apricots,
raisins, and peaches. Other products are cottonseed oil for cooking,
wine, and tobacco.

Uzbekistan - Labor Force

The swelling of the working-age population has led to high rates of
unemployment and underemployment (see Population, this ch.). At the same
time, despite relatively high average levels of education in the
population, the shortage of skilled personnel in Uzbekistan is also a
major constraint to future development (see Education, this ch.).
Russians and other nonindigenous workers traditionally were concentrated
in the heavy industrial sectors, including mining and heavy
manufacturing. With the independence of Uzbekistan and the outbreak of
violence in several parts of Central Asia, many of these skilled
personnel left the country in the early 1990s. In 1990 as many as 90
percent of personnel in Uzbekistan's electric power stations were
Russians. Because Russian emigration caused a shortage of skilled
technicians, by 1994 half of the power generating units of the Syrdariya
Hydroelectric Power Station had been shut down, and the newly
constructed Novoangrenskiy Thermoelectric Power Station could not go on
line because there was nobody to operate it. In the mid-1990s, training
programs were preparing skilled indigenous cadres in these and other
industrial sectors, but the shortfall has had a strong impact.

Uzbekistan - Postcommunist Economic Reform

With the collapse of the Soviet Union, Uzbekistan faced serious
economic challenges: the breakdown of central planning from Moscow and
the end of a reliable, if limited, system of interrepublican trade and
payments mechanisms; production inefficiencies; the prevalence of
monopolies; declining productivity; and loss of the significant
subsidies and payments that had come from Moscow. All these changes
signaled that fundamental reform would be necessary if the economy of
Uzbekistan were to continue to be viable.

Traditionally a raw materials supplier for the rest of the Soviet
Union, Uzbekistan saw its economy hard hit by the breakdown of the
highly integrated Soviet economy. Factories in Uzbekistan could not get
the raw materials they needed to diversify the national economy, and the
end of subsidies from Moscow was exacerbated by concurrent declines in
world prices for Uzbekistan's two major export commodities, gold and
cotton.

Uzbekistan - Structural and Legal Reform of the Economy

From the time of independence, Uzbekistan's political leaders have
made verbal commitments to developing a market-based economy, but they
have proceeded cautiously in that direction. The first few years were
characterized mainly by false starts that left little fundamental
change. The initial stages of reform, instituted in 1992, were partial
price liberalization, unification of foreign-exchange markets, new
taxes, removal of import tariffs, and privatization of small shops and
residential housing. Laws passed in 1992 provided for property and land
ownership, banking, and privatization. Modernization of the tax system
began in 1992; the first steps were a value-added tax (VAT--see
Glossary) and a profits tax designed to replace income from the tax
structure of the Soviet period.

In its first effort at price liberalization in 1992 and 1993, the
government maintained some control on all prices and full control on the
prices of basic consumer goods and energy. A wide range of legislation
set new conditions for property and land ownership, banking, and
privatization--fundamental conditions for establishing a market
economy--but in general these provisions were limited, and they often
were not enforced. International financial institutions initially were
encouraged to believe that structural adjustments would be made in the
national economy to accommodate international investment, but later such
promises were rescinded. In 1994 the government maintained control of
levels of production, investment, and trade, just as Moscow had done in
the Soviet era. Several agencies, most notably the State Committee for
Forecasting and Statistics, the State Association for Contracts and
Trade, the Ministry of Foreign Economic Relations, and the Ministry of
Finance, inherited responsibility for planning, finance, procurement,
and distribution from the Soviet central state system. Economic policy
making remains based on a national economic plan that sets production
and consumption targets. State-owned enterprises remain in virtually all
sectors of the economy. In 1994 no laws had established standards for
bankruptcy, collateral, or contracts. But by 1995 Uzbekistan had made
some significant movement toward reform, which experts interpreted as a
possible harbinger of wider-ranging changes in the second half of the
decade.

Privatization

Privatization of the large state industrial and agricultural
enterprises, which dominated the economy in the Soviet era, proceeded
very slowly in the early 1990s. The initial stage of privatization,
which began in September 1992, targeted the housing, retail trade and
services, and light industry sectors to promote the supply of consumer
goods.

Beginning with the 1991 Law on Privatization, a number of laws and
decrees have provided the policy framework for further privatization. A
state privatization agency, established in 1992, set a goal of moving 10
to 15 percent of state economic assets into private hands by the end of
1993. Movement in that direction was slow in 1992, however, with only
about 350 small shops being privatized. In the same period, housing was
privatized at a somewhat faster pace by outright transfers or low-cost
sales of state housing properties. By 1994 about 20,000 firms in small
industry, trade, and services had been transferred from state ownership
to the ownership of managers and employees of the firms. Nearly all such
transfers were through the issuance of joint-stock shares or by direct
sale.

Agricultural privatization, which began in 1990, has moved faster.
Since the state began distributing free parcels of land that could be
inherited but not sold, the number of peasant farms has risen
dramatically (cotton-growing lands were excluded from this process).
Between January 1991 and April 1993, the number of private farms rose
from 1,358 to 5,800, promising a significant new contribution from
private farms to Uzbekistan's overall agricultural output (see
Agriculture, this ch.). Another government program, initiated in 1993,
transfers unprofitable state farms to cooperative ownership. A law
permitting the transfer of privately owned land was planned for 1995.

In the mid-1990s, the role of the state was gradually reduced in the
productive sectors, except for energy, public utilities, and gold. The
government's privatization program for 1994-95 emphasized the sale of
large and medium-sized state-owned construction, manufacturing, and
transportation enterprises. A set of guidelines for large-scale
privatization, which went into effect in March 1994, contained several
contradictory provisions that required clarification, and privatization
also was slowed by the need to change the monopoly structure of
state-owned enterprises before sale.

In mid-1995, the government reported that 69 percent of enterprises
(46,900 of 67,700) had been privatized. Most firms in that category are
relatively small, however, and all heavy industry remained in state
ownership at that stage. Although the government has promised
accelerated privatization of larger firms, experts did not expect the
slow pace to improve in the late 1990s.

Currency Reform

According to some experts, a turning point came in late 1993 after
Uzbekistan and Kazakstan were expelled from the ruble zone (see
Glossary), in which Uzbekistan had remained with vague plans to adopt an
independent national currency at some time in the future. Following the
example of Kyrgyzstan, which already had created its own currency the
previous May, in November 1993 Uzbekistan issued an interim som coupon.
The permanent currency unit, the som, went into effect in the summer of
1994 (for value of the som--see Glossary). The introduction of the som
was followed by an improving domestic economic situation, including some
progress toward economic stabilization and structural reform. Beginning
in late 1994, the national economy achieved substantial price
liberalization, a reduction in subsidies, elimination of state orders on
most commodities, and some freeing of state controls in the agricultural
sector. In 1994 the som was one of the weaker new currencies in Central
Asia; it lost two-thirds of its value in the second half of 1994. By the
end of the year, however, inflation had leveled off, and the free-market
exchange rate of the som stabilized by January 1995. In July 1995, the
government announced plans to make the som fully convertible by the end
of the year. At the beginning of 1996, the som's value was thirty-six to
US$1.

Uzbekistan - Banking and Finance

Uzbekistan began a movement toward a two-tier banking system under
the old Soviet regime. The new structure, which was ratified by the
Banking Law of 1991, has a government-owned Central Bank wielding
control over a range of joint-stock sectoral banks specializing in
agricultural or industrial enterprise, the Savings Bank (Sberbank), and
some twenty commercial banks. The Central Bank is charged with
establishing national monetary policy, issuing currency, and operating
the national payment system. In performing these operations, the Central
Bank manipulates as much as 70 percent of deposits in the more than
1,800 branches of the Savings Bank (all of which are state owned) for
its own reserve requirements. A National Bank for Foreign Economic
Affairs, established in 1991 as a joint-stock commercial bank, conducts
international financial exchanges on behalf of the government. The
national bank holds Uzbekistan's foreign currency reserves; in 1993 it
was converted from its initial status to a state bank.

In the mid-1990s, the banking structure in Uzbekistan was limited to
only a handful of primarily state-owned banks, and, compared with
Western banking systems, the commercial banking system was still in its
infancy. But the establishment in the spring of 1995 of Uzbekistan's
first Western-style banking operation--a joint venture between Mees
Pierson of the Netherlands and other international and Uzbekistani
partners--suggests that this sector, too, may have prospects for change.
The Uzbekistan International Bank that would result from the new joint
venture is intended primarily to finance trade and industrial projects.
The bank is to be based in Tashkent, with 50 percent of ownership shares
in Western hands. If successful, this and other similar ventures may
reward policy makers' cautious approach to reform by establishing an
infrastructure from which economic growth can begin.

CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

TRY USING CTRL-F on your keyboard to find the appropriate section of text